Dear Friends
I always think that September marks the start of a new round of client activity, conferences, etc. – perhaps because having four children, it has always marked the start of the new academic year. This year, I have particular reason for being excited about the coming year, due to several specific opportunities which IFS is developing with highly reputed firms.
The first is that IFS has recently entered into a strategic relationship with UK law firm Memery Crystal, who have been my lawyers since 1975 and with whom we have a number of key mutual clients. Memery Crystal is a full service firm with market leading lawyers in each of its core practice areas and a client base particularly focused on individual entrepreneurs and growth companies. The firm was recently ranked by Hemscott as the top legal adviser to companies listed on the AIM Market of the London Stock Exchange (based on number of AIM clients) and has also received a “Tier 1” ranking for its AIM work by the Chambers Guide to the UK’s best lawyers. Memery Crystal has a strong international focus, with considerable cross-border transactional and litigation experience and strong relationships with other leading law firms around the world. This development between IFS and Memery Crystal will facilitate cooperation and enable us to offer our respective clients a fuller and more integrated range of services and significant added value.
The second exciting development is a co-operation that we have developed over the past six months with Finimmo Wealth Management, a Luxembourg based independent Professional Service Company. The cooperation with Finimmo offers IFS a unique opportunity to deliver Luxembourg Services & Solutions “B2B” to the Legal, Private Banking, Private Equity, Real Estate & Wealth Management professionals. A first opportunity to meet with Finimmo is offered by IFS & Finimmo to you at the occasion of a Luxembourg Services & Solutions Seminar hosted at the Luxembourg House in the Embassy of the Grand Duché du Luxembourg on October 4 at 8 AM, organised by the B-Luxembourg CC in GB. You may register by sending a mail direct to Simon P. Saverys at sps@finimmo.com
The topic of Luxembourg will also be an integral part of the Luxembourg meeting of the ITPA to be held on 16-18 October at the Hilton Hotel in Luxembourg (see details at www.itpa.org). The role of Luxembourg in the international financial community has been understated, as this month’s newsletter article on Luxembourg explains.
As regards conferences, I will be speaking at two conferences over the next month, the first being a conference presented by Patrick Soares of Grays Inn Tax Chambers entitled ‘101 Corporate Tax Planning Ideas’ (see details at www.ibc-events.com) to be held on 25 October at the Millennium Hotel, Knightsbridge, London. I will be speaking on corporate re-domiciliation, which is a very relevant topic at present for many Australian mining companies. In July 2012 these will become subject to a 30% Australian Minerals Resource Rent Tax (MRRT), formerly known as Resource Super Profits Tax, chargeable on profits from mining iron ore and coal. MRRT will be only levied on above-normal “mega” profits, however it will be payable in addition to income tax, which may result in a combined effective tax rate exceeding 45%.
The second conference is our own second annual ITSAPT conference to be presented by IFS at the Landmark hotel in London on 3 November 2011. The topic this year will be personal and corporate migration and, as for last year, we have the same respected speakers from the US, Singapore, Israel, Hong Kong, Switzerland and many EU countries with Philip Baker QC, also of Grays Inn Tax Chambers, in the chair. All of the speakers will be looking at the issues of personal and corporate migration from the point of view of their jurisdiction, with Philip and I giving an overview of the OECD, EU and other international views on this very interesting topic. As for last year, we will hold a cocktail party in the Gazebo at The Landmark hotel after the conference, so that delegates and speakers can discuss matters of mutual interest. The programme and booking form is on our website (click here). Readers of our Newsletter will be entitled to a discounted rate of £750 for bookings made prior to 30 September 2011.
I hope that the start of the new academic year is an exciting one for you, our valued IFS newsletter readers, and I look forward to seeing you at an early opportunity.
With kind regards
Roy Saunders
LUXEMBOURG’S INTERNATIONAL ROLE
According to the IMF, the volume of securities portfolio investments in Luxembourg far exceeds the amounts in the Caribbean, Switzerland, Hong Kong and Singapore, with a healthy ratio of bank deposits compared to these countries. So clearly Luxembourg is doing something right, albeit with a lower profile than its competitor countries, and indeed in the international tax arena, Luxembourg has always maintained a lower profile than, for example, the Netherlands and Switzerland. Yet it clearly offers some excellent opportunities with specific entities introduced under Luxembourg law. This article will examine some of these beneficial entities which, as fully taxable Luxembourg companies, will be able to benefit from the excellent double tax treaty network that Luxembourg has with the rest of the world.
Holding companies
Prior to the introduction of the SOPARFI legislation of 24 December 1990, Luxembourg’s main attraction was the 1929 exempt holding company (now extinct) as well as being the centre for insurance companies offering insurance ‘wrappers’ so that income could be accumulated and only taxable when the insurance bonds were redeemed. The SOPARFI legislation attempted to put Luxembourg on a par with the Netherlands as regards a participation exemption in respect of dividends and capital gains, yet the requirements relating to minimum tax rates of subsidiary companies meant that Dutch holding companies were far preferable for holdings of low taxed subsidiaries. Indeed, this may still be partially true since subsidiary companies should be taxed at a rate corresponding to the Luxembourg corporate income tax rate (generally a rate of 10.5% would be sufficient). However, The SOPARFI legislation has been amended so that the participation exemption is relevant for all subsidiaries resident in an EU member state and covered by the EU Parent Subsidiary Directive, so that for example Cyprus companies taxed at 10% or even Maltese companies taxed at an effective 5% tax rate may be owned by a Luxembourg holding company within the participation exemption regime.
A major concern to investors in Luxembourg holding companies has always been the Luxembourg withholding tax on dividends payable which is at a standard rate of 15%. However, withholding tax will not be payable where distributions are made to any EU resident company under the EU Parent Subsidiary Directive, or a company that is resident in a State with which Luxembourg has a double tax treaty; subject to the requirements of a 10% participation for at least a 12 month period or an acquisition price of at least €1.2mn. Having relatively recently entered into a double tax treaty with Hong Kong, a territorial based jurisdiction, it is not difficult to structure a low taxed European business activity through a Luxembourg holding company under the SOPARFI regime which is itself owned by a Hong Kong company, so that dividends are neither taxable in Luxembourg, nor subject to withholding tax in Luxembourg, and also not taxed in Hong Kong under the territorial system since the income did not arise in Hong Kong.
Securitisation vehicles
An exciting new entity was introduced in 2004 under the Law on Securitisation which aims to develop Luxembourg as a securitisation hub. The securitisation vehicle (SV) can be set up either as a corporate entity or as a fund managed by a management company and governed by management regulations. My preference is as a corporate entity since then the SV can then benefit from the wide range of double tax treaties entered into by Luxembourg. Although the SV is fully liable to corporate income tax and municipal business tax, any ‘commitments’ that the SV has to investors and creditors are fully tax deductible. Thus, the SV could issue preference shares to investors, the dividends on which would be deductible against corporate profits; could issue bonds to investors, the interest on which would be fully deductible against corporate profits. Or indeed any other form of security including hybrid ones which would provide the maximum tax efficiency for the relevant jurisdiction in which the investors are resident. Even undistributed income which is nevertheless committed for the benefit for investors or creditors may be fully deductible against corporate profits.
SV’s are useful for many types of investments, since the income and gains from specific investments are ‘stapled’ to the specific security issued by the SV to the investor, ie there is a ring-fence vis a vis other investors and their investments which is provided under the relevant securitisation law. Thus, an SV could invest, for example, in French real estate by issuing a preference share or other security to the relevant investor who may be offshore and would otherwise have to pay the 3% special tax in France on a direct real estate investment. Provided the SV is owned by Luxembourg residents (or residents of another country which has a relevant double tax treaty with France), then the relevant form for exemption from the 3% tax can be complied with. The extension of such investments to real estate located in other countries is quite clearly an interesting planning concept.
I have suggested the use of an SV for ownership of intellectual property rights where individual rights are acquired by a different group of investors to those investing in other intellectual property rights, yet there is only one commercial entity that has legal ownership and effective management of all these IPR’s. Unlike the protected cell company, which I believe is vulnerable to attack as a nominee for the owner of the specific cell, the Luxembourg SV will be able to participate in income derived from underlying assets, even if to a minimal extent, whilst at the same time it has an effective management role in respect of these assets and cannot therefore be considered a pure nominee. It is for reasons of this place of effective management (POEM) that the Luxembourg SV can benefit from the double tax treaty network entered into by Luxembourg.
Investment Funds
There are various investment regulated vehicles under Luxembourg law which may also be formed as Luxembourg companies in order to benefit from the relevant double tax treaty network. The SICAV or variable capital investment company (Société d’Investissement à Capital Variable) is an open ended retail fund which may be formed as a limited liability company, qualifying as UCITS as an umbrella fund with compartments. This is fully tax exempt except for the subscription tax which is less than 0.05% of the capital. The SICAF is an investment company with fixed capital (Société d’Investissement à Capital Fixe) and is similar to the SICAV, except that its fixed capital means a finite investment activity.
The SICAR (Société d’Investissement en Capital a Risque) was introduced in 2004 for specific forms of risk capital such as private equity and venture capital transactions. It is used by ‘sophisticated investors’ and although fully taxable, all dividends, interest and gains are exempt from tax and there is no net worth tax applicable to SICARs. Moreover, there are no withholding taxes on dividends payable to shareholders irrespective of where they are located and the extent of their investment (as opposed to the general Luxembourg legislation as explained above under the SOPARFI section). The SICAR offers a light degree of regulation as it is adapted to meet the needs of the sophisticated investor.
The Specialised Investment Fund (SIF) was introduced in 2007 to deal with the demand from sophisticated investors for a lightly regulated onshore investment fund vehicle. It can be used for any type of investment including real estate and is one of the fastest growing investment fund vehicles in Luxembourg. Again, only ‘sophisticated’ investors may invest in the SIF which is exempt from Luxembourg corporate income tax, municipal business tax and net wealth tax. And again, profit distributions made by a SIF to its investors are not subject to any withholding tax. The SIF is subject to an annual subscription tax of just 0.01% on its net assets, with certain assets being exempt from this tax. The SIF qualifies for relief under approximately half of Luxembourg’s double tax treaties.
To a great extent, Luxembourg has been hiding its light under a bushel, a biblical idiom relating to often shy individuals who avoid letting people know that they are good at something. This Luxembourg awareness process is now handled by Luxembourg for Finance www.LFF.lu, a government sponsored organisation which is mandated to promote the benefits offered by Luxembourg within the international community. Our Luxembourg strategic co-operation with Finnimo has therefore been put in place to assist LFF in developing this awareness. For this reason, we are looking forward to welcome you without charge – as a valued IFS newsletter reader – at the Seminar at the Luxembourg House on October 4 AM: please confirm your interest to attend directly to sps@finimmo.com.